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Fifth Third Bancorp Earnings - Analysis & Highlights for Q4 2024

Overview

PositivesNegativesOutlook

Loan growth accelerated in December, resulting in a strong period-end loan growth of 3%, with average loans increasing 1% sequentially.
Expenses excluding the items noted on page 2 of the release, adjusted non-interest expense was up 1% YoY and decreased 1% sequentially.
Wealth fees grew 11% YoY to $163 million due to AUM growth and increased transactional activity at Fifth Third Securities.
The company resumed share repurchases in Q2 and raised its dividend in Q3. In total, for the year, it returned $1.6 billion of capital to its shareholders, while also increasing its CET1 ratio by more than 20 basis points.
The company expects average total loan balances to increase 2% in Q1 due to continued momentum in C&I and auto.

Q4 2024 Earnings Call

Interest-bearing core deposits peaked at 2.99% in August and were down to 2.49% in December, representing a core deposit beta in the upper 50s.
The company's provision expense for Q4 resulted in a $43 million build in its allowance for credit losses.
The company's expenses grew by 2% YoY and 1% sequentially, excluding the impact of the deferred comp mark.
The company's results were impacted by certain items.

Q4 2024 Earnings Call

Average total loan balances are expected to increase by 2% in Q1 due to continued momentum in C&I and auto.
The company expects to keep CET1 inclusive of AOCI north of 8% and to increase over time with the pull-to-par on the investment portfolio.
The company expects to achieve full-year guidance for NII, fees, expenses, PPNR, and net charge-offs.
The company will continue to focus on stability, profitability, and growth in that order and to stay balanced in its positioning while investing with the long term in mind.
The company expects adjusted revenue to be up 4% to 6%, PPNR to grow in the 6% to 7% range, and positive operating leverage closer to 2%.

Q4 2024 Earnings Call

Q&A Highlights from Fifth Third Bancorp Earnings Call Q4 2024

Analyst asked about the increase in C&I non-accruals in the quarter.
- The increase was driven by five commercial borrowers, with an average loan size of $32 million. There were no discernible industry or geographic trends, and no concentrations among these borrowers. The company remains within a few basis points above its ten-year commercial average, and the increase was relatively flat from a ten-year average perspective. The largest of the NPA inflows this quarter is expected to pay off or pay down within the first half of the year, either through debt reduction or a full payoff.
Analyst asked about the company's ability to outperform on loan and deposit growth given the investments made.
- The company has made investments to improve its loan and deposit growth, including the addition of sales teams in new markets and a 20% increase in middle market head count. These investments will be strong tailwinds for the company from an NII perspective. The company's pricing flexibility allows it to toggle between growing deposits and managing margins, depending on the needs of the balance sheet. The company's new branch builds are concentrated in Nashville, North Carolina, and Southwest Florida, with additional branch activity expected in the Southeast coast, South Carolina, and North Florida. The company is also planning to open its first branch in Birmingham, and will see a pickup in Atlanta in the two to three-year timeframe.
Analyst asked about the company's target for CET1, including AOCI, and how they plan to manage their capital, including buybacks.
- The company aims to keep CET1 inclusive of AOCI north of 8%, and they expect this to increase over time with the pull-to-par on the investment portfolio. They have a strong AFS portfolio with a duration of 3.8, and they feel confident about the AOCI accretion they should see over the next couple of years. Their capital priorities are supporting organic growth, maintaining a strong dividend, and then buybacks, and the ultimate level of buybacks will be around 10.5%.
Analyst asked about the company's position in the market, specifically in relation to payments-led commercial relationships.
- The company has a strong position in the market, with a turnover ratio that is higher than their peers. They have 3.5 times the market share in major commercial payments rails, and they are growing faster than the industry as a whole. They are also a beneficiary when traditional FIs lose market share to non-banks, and they have top-in-the-peer-group penetration rates in terms of active treasury management relationships with their lending customers.
Analyst asked about upside and downside risks for the company in 2025.
- Bryan D. Preston, CEO of Fifth Third Bancorp, highlighted loan growth and deposit costs as potential risks. He also mentioned that NII (net interest income) could be a concern due to his treasury background, but the company feels good about its trajectory. Additionally, market activity from a fee perspective and capital markets could see some volatility.
Analyst asked about the company's approach to M&A, specifically non-bank M&A and the need for scale in the banking industry.
- Timothy N. Spence, President and Chief Operating Officer of Fifth Third Bancorp, provided an overview of the banking industry's consolidation and the administration's desire for more competition among larger banks. He noted that the company could have made the math work for a deal prior to this year and believes they could have gotten approval. He emphasized the value of density in the markets where the company competes, diversification, and the ability to invest in human capital and technology innovation. He also mentioned that the company is not interested in pursuing scale at any cost and has the ability to grow organically. On the non-bank front, the company is interested in adding to its capacity in managed services and commercial payments.
Analyst asked about the return profile for Fifth Third Bank as the company looks at ROTCE and operating efficiency for 2025 and beyond.
- Timothy N. Spence, CEO of Fifth Third Bank, explained that the company is already within reach of its return targets and is confident that it can achieve returns in excess of its cost of equity. He highlighted the stability, profitability, and growth of the business, as well as the company's neutral position in ALM and defensive stance in credit. He mentioned that the company's production in the fourth quarter was better than its existing portfolio, and that it feels good about its profitability, with mid-to-high teens ROTCE and a mid-50s efficiency ratio. He also stated that the goal for the company is to sustain that level of performance and grow tangible book value per share, assuming a more benign macro backdrop.
Analyst asked about middle market customers' challenges in labor and their plan to offset these challenges.
- Timothy N. Spence explained that middle market customers are hopeful that labor challenges will solve themselves, but they are also trying to offset these challenges with technology. He mentioned that some sectors, such as manufacturing and logistics wholesale distribution, are implementing facilities to support retooling of manufacturing facilities and warehouses, including robots that can restack racks and move SKUs around overnight. He also mentioned that healthcare clients are hoping for a graduating class from nursing schools to overtake the demand for traveling nurses, but he is less optimistic about this. He concluded by saying that the company hears a mix of optimism and concern from clients about the direction of travel on labor, and that the negative birth rate in the US and the demographic pyramid pose a structural problem that can only be solved by boosting productivity with technology.
Analyst asked about the company's approach to corporate and middle market banking, specifically regarding the balance between the two segments and the impact of labor pressures on different sized companies.
- The company aims to maintain a balanced approach between corporate and middle market banking, with a focus on granularity and consistent growth. Large corporations are generally better equipped to navigate labor pressures due to their investment capacity, automation, and pricing power. However, the company expects corporate banking to grow at a similar rate to middle market banking, with a focus on balance and consistency.
Analyst asked about the company's net interest income (NII) outlook, specifically regarding the expected trajectory of the net interest margin (NIM) and the impact of a 4% neutral rate on the company's normalized margin.
- The company expects the NIM to continue to improve by a few basis points each quarter throughout the year, with the potential for a return to the 3.20s in the current rate environment. The trajectory of the NIM will be influenced by the shape of the curve and the balance sheet mix, but the company feels good about its current progress. Both NII and NIM are expected to continue to improve each quarter throughout the year.

Q4 2024 Earnings Call